US Treasury Explores Digital ID Integration in DeFi Smart Contracts

• Potentially incorporating digital identification credentials directly into the code of DeFi protocols is one of the concepts proposed.
• This approach proposes integrating KYC and AML measures into blockchain infrastructure via the use of smart contracts.

An alternative being considered by the US Department of the Treasury is incorporating identity verification into decentralized finance (DeFi) smart contracts; nevertheless, there are other potential uses for digital identification tools and other new technologies in the battle against criminal financing in cryptocurrency markets.

Recently passed into law, the Genius Act (Guiding and Establishing National Innovation for US Stablecoins) is the source of the consultation that was made public this week.

The Act mandates that the Treasury investigate emerging compliance technologies, such as blockchain monitoring, digital identity verification, application programming interfaces (APIs), and artificial intelligence. It establishes a legal framework for payment stablecoin issuers.

Banking on Digital Identification

Potentially incorporating digital identification credentials directly into the code of DeFi protocols is one of the concepts proposed in the call for feedback. This approach proposes integrating KYC and AML measures into blockchain infrastructure via the use of smart contracts, which might automatically validate a user’s credentials before to completing a transaction.

Digital identification solutions, such as government IDs, biometrics, or portable credentials, might enhance privacy safeguards and decrease compliance costs, according to Treasury. Financial institutions and DeFi providers may find it simpler to identify money laundering, terrorist funding, or sanctions evasion before transactions happen if they have these capabilities.

Concerns about data protection and the need to strike a balance between innovation and regulatory supervision are among the possible obstacles that Treasury has recognized. In a statement, the Treasury emphasized that it is open to feedback on any topic that stakeholders deem pertinent to its initiatives.

Comments will be accepted until October 17, 2025. After the consultation, Treasury will provide a report to lawmakers outlining their findings, which might lead to new regulations or recommendations for guidance.

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